Report No. 63

2.3. Justifications for charging interest-money as productive of income.-

In economic theory, the justifications of interest are many. One writer1 has thus analysed the position:

"The first formal, theoretical justification of interest was a demonstration that the use of money could be productive of income. Although fragmentary indications were prevalent in earlier writings, the productivity approach to interest theory really developed with Adam Smith (1723-1790). Despite many variations, the basic thesis is that money will be borrowed and interest paid, so long as the return that can be earned on the borrowed funds exceeds the interest rate. Interest was, therefore, paid because income could be derived from the use of money."

1. William Kinnard Jr. (University of p. 191. Connecticut), Article on Interest, in Encyclopaedia Americana, Vol. 15,

2.4. Another economic justification for interest-the theory of "time preference"-has been explained by the same writer1 in these words:

"The supply side of interest rate theory was first treated systematically by Eugen Bohm-Bewerk in the 1880's. His was a time preference, or abstinence theory. According to it, the worth of a sum of money presently held is greater than the worth of the same sum payable at some time in the future. The preference of the lender for money to use now over money promised in the future causes him to require some premium."

1. William Kinnard Jr. (University of p. 191. Connecticut), Article on Interest, in Encyclopaedia Americana, Vol. 15,